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Reducing the Price That Government Pays in
Procurement: the Case of the Philippines
Stamer, Roderica Taduran
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Stamer, Roderica Taduran: Reducing the Price That Government Pays in Procurement: the Case of the Philippines.
In: Südostasien aktuell : journal of current Southeast Asian affairs 26 (2007), 4, pp. 5-30. URN: http://nbn-resolving.de/
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Südostasien aktuell 4/2007
5
Studie
Reducing the Price That Government Pays in
Procurement. The Case of the Philippines
Roderica Taduran Stamer
Abstract
The Philippine government now pays less for the same goods it used to procure some years ago.
In some cases, the reduction in price reaches as much as 50 percent. What dramatic change
is responsible for this result? How did the change take place? Recent economic research has
emphasized the importance of institutions in fostering economic development. Further, institutional
changes occur whenever organizations deem it profitable. This framework shall be used in order
to answer the questions above. Firstly, it will be argued that the savings that the government now
enjoys are due to the successful implementation of reform measures in its procurement system.
In particular, electronic procurement was established and in 2003 a new comprehensive law
was passed. The paper will analyze some of the reforms’ features in clipping opportunities for
corruption, removing barriers to entry, and lessening the likelihood of collusion. Secondly, the
paper will argue that the public furor over corruption in government, which reached a climax
during the impeachment of a previous president, provided the much-needed push for the reforms.
The potential savings that the government was not able to realize in the old procurement system
was the primary ‘selling point’ for the passage of the new law. (Manuscript received February 16,
2007; accepted for publication June 25, 2007)
Keywords: Philippines, Public Procurement, Corruption, Institutional economic theory
The Author
Roderica Taduran Stamer 1 is a PhD candidate at the University of Hamburg, Faculty of Economics.
She studied Economics at the University of the Philippines and did an internship at the GIGA
Institute of Asian Studies in 2006. Her current research focuses on institutional economic theory
and its empirical application. E-Mail: [email protected]
1 The author is grateful for helpful discussions on the on-going procurement reforms in the
Philippines to Gladys Cagadoc (Dept of National Defense), Yvonne Chua (formerly Philippine
Center for Investigative Journalism), Elmer Dorado (National Economic and Development Authority), Joele Eayte (Government Electronic Procurement System), Antonio Molano (Department
of Public Works and Highways), Dondon Parafina (Government Watch), Cipriano Ravanes Jr (Procurement Watch Inc.), and for proofreading to Manfred Stamer.
6
Südostasien aktuell 4/2007
Studie
Preisreduzierung im öffentlichen
Beschaffungswesen am Beispiel der Philippinen
Roderica Taduran Stamer
Abstract
In den Philippinen muss die öffentliche Hand signifikant weniger Geld für Beschaffung von Gütern
und Dienstleistungen aufbringen als noch vor wenigen Jahren. In einigen Bereichen ist sogar eine
Preissenkung von 50% zu verzeichnen. Wie ist diese Entwicklung zu erklären? Wie ging dieser
Wandel von statten? Diese Fragen sollen auf der Grundlage von Erkenntnissen der Institutionenökonomie, nach der Institutionen ökonomische Entwicklungen begünstigen und utilitaristisches
Organisationskalkül institutionellen Wandel fördere, beantwortet werden. Es wird erstens argumentiert, dass die Ersparnisse durch Preisreduzierung primär auf erfolgreiche Reformanstrengungen
der Regierung, worunter die Einführung eines elektronisch gestützten Beschaffungswesens und
das In-Kraft-Treten eines umfassenden Gesetzes über das öffentliche Beschaffungswesen fallen,
zurückzuführen sind. In diesem Zusammenhang werden in der vorliegenden Studie Reformaspekte
wie Korruptionsabbau, Eintrittshürdensenkung und Vermeidung geheimer Absprachen behandelt.
Es wird zweitens argumentiert, dass das öffentliche Aufsehen um Regierungskorruption, das seinen
Höhepunkt in der Amtsenthebung des letzten Präsidenten fand, als Reformauslöser zu sehen ist.
Darüber hinaus konnten die unter dem alten Gesetz nicht realisierten Ersparnisse als „Verkaufsargument“ für das neue Beschaffungsgesetz genutzt werden. (Manuskript eingereicht am 16.02.2007;
zur Veröffentlichung angenommen am 25.06.2007)
Keywords: Philippines, öffentliches Beschaffungswesen, Korruption, Institutionenökonomie
Die Autorin
Roderica Taduran Stamer schreibt derzeit ihre Doktorarbeit an der wirtschaftswissenschaftlichen
Fakultät der Universität Hamburg. Sie hat Volkswirtschaft an der University of the Philippines
studiert. Im Jahr 2006 absolvierte sie ein Praktikum am GIGA Institut für Asien-Studien. Derzeit
befasst sie sich mit institutionenökonomischen Ansätzen und ihrer empirischen Anwendung. E-Mail:
[email protected]
Public Procurement in the Philippines
7
1 Introduction
In 1998, each textbook provided by the Philippine government to public elementary schools had to be shared by six (6) children. In high schools, eight (8)
children were in the same situation. But since then, the price of textbooks has
plummeted by 50 percent, allowing the government to purchase more. Now
each child in public elementary schools as well as in high schools has a textbook
for him- or herself. This improvement in procurement is widespread and is
shared by other branches of the Philippine government.
What dramatic change is responsible for this result? This paper 1 will argue
that the savings that the government now enjoys are due to the reform measures
in its procurement system. In particular, electronic procurement was established.
Further, in 2003 a new comprehensive law was passed. Through these reforms,
opportunities for corruption have been reduced, barriers to entry removed and
likelihood of collusion lessened.
But what prompted the changes in the system? North (1990) explains that
institutional changes occur whenever organizations deem it beneficial. In the
case of procurement reforms in the Philippines, the paper will argue that the
public furor over corruption in government provided the much-needed push. At
a time when the highest office of the land was rocked by a serious corruption
scandal resulting in the impeachment of the President, anti-corruption efforts
were very much supported. When the new procurement law was passed, it was
hailed by politicians of the new administration as a successful first step in fighting
against corruption.
Section 2 reviews the literature on the importance of good institutions for
economic development, highlighting the role that low transaction costs play.
It goes further and examines the impact of corruption on transaction costs,
particularly in procurement. Section 3 talks about the prevalence of poor
institutions that marked the state of public procurement in the Philippines prior
to the reforms. Section 4 discusses how the reform efforts came about, arguing
that the potential savings that the government was not able to realize in the old
1 An earlier version of the paper was presented at the Workshop on Institutional Analysis of the
Ronald Coase Institute on 16-21 September 2006 and at the 10 th ISNIE Conference at Boulder,
Colorado on 21-24 September 2006, at which the participation of the author was generously
sponsored by the Ronald Coase Institute. The author is thankful for comments from participants
thereat, especially Phil Keefer (World Bank) and John Nye (Washington University at St. Louis).
8
Roderica Taduran Stamer
procurement system was the primary ‘selling point’ for the passage of the new law.
Section 5 then analyzes some of the law’s features in reducing opportunities for
corruption, breaking barriers to entry and lessening the likelihood of collusion,
and presents some preliminary success indicators. Section 6 concludes.
In so doing, the paper adds to the efforts of Evenett and Hoekman (2005), who
examine the available evidence on public procurement practices in developing
countries, and concludes that while there is a considerable agreement on ends,
little information is available on means, particularly on the effective and replicable
strategies that developing countries can adopt to improve public procurement
systems.
2 Institutions, Transaction Costs, and Economic Development
Institutions, as defined by North (1990), are the humanly devised constraints that
shape human interaction. They include both formal and informal constraints.
Rules that human beings devise such as a country’s constitution, laws and statutes
are examples of formal constraints, while conventions, norms and codes of
behaviour are informal constraints.
Recent economic research has emphasized the important role that institutions
play in the economy. The International Monetary Fund (IMF) (2005), using data
for 1970-2004 among developing countries, calculates that improving the quality
of domestic institutional frameworks is associated with a subsequent 2 percentage
point increase in GDP growth, a durable though relatively modest improvement
in the amount of private sector investment, and a substantial improvement in
total factor productivity.
How do institutions impact on the economy? Institutions affect the performance of an economy by their effect on the costs of transaction and production.
Transaction costs refer to the costs of carrying out a transaction by means of an
exchange on the open market (Coase 1937). Elaborating, Coase (1961) explains,
[i]n order to carry out a market transaction it is necessary to discover who
it is that one wishes to deal with, to inform people that one wishes to deal
and on what terms, to conduct negotiations leading up to a bargain, to
draw up the contract, to undertake the inspection needed to make sure
that the terms of the contract are being observed, etc.
Thus, if institutions prevailing in an economy create an environment where
transactions costs are low, more transactions naturally will be undertaken.
But what makes transacting costly? In any transaction, one party would
Public Procurement in the Philippines
9
always have an information advantage over the other party about some valued
attribute of what is being exchanged. The original party may even stand to gain
by concealing that information. A classic example is the market for second-hand
cars, where the quality of the car is perfectly known to the seller but not to
the buyer. Another example is presented by the labor market, wherein the
job applicant knows exactly what she or he is capable of doing, but not the
prospective employer. Thus, gathering information to measure such concealed
attributes and monitor them result in the costs of transacting.
2.1 Transaction Costs in the Economy Increases with Corruption
The transaction cost literature has several subdivisions. For purposes of this paper,
we shall take a look at non-market transaction costs. While other branches of the
literature examine the effect of transaction costs on contractual arrangements of
production, the non-market transaction cost literature looks into how transaction
costs affect the amount and type of goods and services that are produced and
available in the market. Examples of non-market transaction costs are the
resources spent in waiting, getting permits, cutting red tapes, bribing officials,
and so on.
De Soto (1989) documented the tremendous cost of doing business formally,
i.e. the cost of meeting legal requirements for starting and running a business,
and those of doing business informally in Peru. Stone, Levy and Paredes (1996)
did a similar study for Chile and Brazil. Benham and Benham (2001) undertook
comparative country studies to measure various costs of exchange and found
that the variation in costs for the same good/service in different countries can
be tremendously large. Emphasized in these works are the government-imposed
cumbersome rules and regulations, such as registration and licensing requirements,
rules on sale or lease of real estate, export and import regulations, and taxes.
These barriers force entrepreneurs to conduct some or all of their business
outside the official economy, i.e. they engage in corrupt transactions, or discourage them from entry altogether. World Bank’s Doing Business in 2004:
Understanding Regulation (2004b) data show support for this claim.
The conduct of business outside the official economy gives rise to another
layer of transaction costs. Lambsdorff (2002) explains that the transaction costs
of corrupt agreements result from a) searching for the appropriate partner; and
b) designing an enforceable contract that will minimize opportunistic behaviour
during and after the course of the corrupt transaction. Thus, the need to
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Roderica Taduran Stamer
camouflage increases further the costs of exchange. It is then not surprising that
Rose-Ackerman (1975), in modelling the behaviour of corrupt agents in public
sector procurement, finds that corruption can lead to, among others, inflated
costs of purchased goods and services. Finally, in constructing the Transactions
Price Index covering 88 countries, Eigen-Zucchi (2001) observes that countries
with the lowest transaction prices are also those that fair better in fighting
corruption.
2.2 Corruption Is Prevalent in Procurement
Corruption pervades in various aspects of the economy. But is it particularly prevalent in procurement. The World Bank (Kaufmann 2005) estimates the amount
of bribery exchanging hands for public procurement bids to be in the vicinity
of USD 200 billion per year. Even bolder, Transparency International (Eigen
2005) reports that estimates of the amount lost due to bribery in government
procurement put the figure at at least USD 400 billion per year worldwide.
2.3 Corruption Alters Procurement Outcomes
Apart from inflating the costs of exchange in procurement, corruption likewise
alters procurement outcomes. The empirical works of Tanzi and Davoodi (1997)
and of Mauro (1998) show that corruption alters government spending by
favouring those spending sectors that present more lucrative opportunities for
rents than other components of spending do.
In the first study, higher levels of corruption are found to be associated with a)
higher share of public investment to total spending, b) lower productivity of public
investment, and c) reductions in spending on categories outside public investments.
The second study reports reduced government spending on education in corrupt
governments, arguing that the sector provides limited opportunities for rentseeking, because it requires widely available, mature technology.
Corruption tends to thrive more when there is a low level of competition
among firms producing what the government purchases. Secondly, the illegal
nature of corruption and the ensuing need for secrecy imply that corrupt officials
will choose goods whose exact value is difficult to monitor. Thus, specialized hightechnology goods and military aircrafts are particularly susceptible to corruption.
Thirdly, corruption and weak controlling and auditing institutions tend to go
hand in hand.
Public Procurement in the Philippines
11
2.4 The International Dimension of Procurement Reforms
Recently, however, the major multilateral development banks – the World Bank,
the African, Asian and Inter-American Development Banks, the European Bank
for Reconstruction and Development – have all adopted new rules for procurement that apply to projects they finance. To use funds from their loans, borrowers
must follow the prescribed rules and the banks supervise their loans to ensure
that the rules are properly applied.
In 1994, the United National Commission on International Trade Law
(UNCITRAL) adopted a Model Law on Procurement of Goods and Construction
as a guide for countries to follow for the evaluation and modernization of their
procurement laws and practices.
More recently, the Organization for Economic Cooperation and Development/Development Assistance Committee (OECD/DAC) and the World Bank
coordinated a round table process in 2003-2004 among developing countries,
bilateral and other multilateral donors to develop an integrated set of tools and
good practices to improve developing country public procurement systems.
The World Bank, in addition, works together with a number of developing
countries in the assessment of their procurement systems. The results of these
processes are published in what is known as the Country Procurement Assessment
Report.
The 27 member countries of the ADB/OECD Anti-Corruption Initiative for
Asia and the Pacific have conducted a review to curbing corruption in public
procurement. The initiative sought to assist governments in better understanding
the corruption risks inherent in their institutional settings and procurement
practices. It likewise aimed to provide an analytical framework to design
rules, procedures, and policies to enhance transparency and integrity in public
procurement.
3 Public Procurement in the Philippines Pre-1999: Poor
Institutions
The institutional framework in most Third World countries today, according
to North (1990), is characterized by conditions that overwhelmingly favour
activities that create monopolies rather than competitive conditions, and that
restrict opportunities rather than expand them. Thus, the organizations that
develop in this institutional framework will become more efficient – but more
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Roderica Taduran Stamer
efficient at making the society even more unproductive and the basic institutional
structure even less conducive to productive activity.
The above assessment may well have been specifically written to depict public
sector procurement in the Philippines prior to 1999. This section of the paper
will explain how outdated, unclear and fragmented procurement laws and rules
resulted in ambiguity and confusion. Weak oversight and regulation did not help
the situation. Thus, an environment that fostered rent-seeking behaviour, where
public procurement officials and suppliers/contractors enriched themselves at
the expense of the government and society, came about, persisted and became
wide-spread.
3.1 Corruption Was Said to Be Persistent in Philippine Public
Sector Procurement
Corruption in the Philippines is pervasive, deeply-rooted and prevalent. In 1997,
the Office of the Ombudsman estimated that some USD 48 billion have been lost
to corruption over the preceding 20 years (Office of the Ombudsman 1997:1).
In June 1999, the President noted that a recent study by his economic advisers
found that 20 percent of government funds for projects in 1998 had ended up as
kickbacks. 2 The country has likewise been governed by two presidents who have
been identified by Transparency International (TI) as among the ten most corrupt
leaders ever worldwide (Transparency International 2004). Not surprisingly, the
Corruption Perception Index (CPI) score of the Philippines in 1999 stood at
3.6 (Transparency International 1999), from a range of 1.0 (high perception of
corruption) and 10.0 (negligible perception). Among the 99 countries covered
by the index, the Philippines ranked 54 th.
The perception of corruption in the country does not only come out in
international surveys, such as those on which the CPI is based. It is likewise
reflected in surveys conducted among the locals. Filipinos perceive a very broad
extent of corruption in the public sector. They see it rampant in two specific
areas: tax collection and procurement.
In early 2000, when 51 percent of the respondents in the national survey
of the Social Weather Stations (2000) believed that there was a ‘great deal’ of
corruption in the public sector 3, they also said that among government activities,
2 These figures from President Joseph E. Estrada are cited in PDI, 10.06.99: Philippine Daily
Inquirer (1999), “Quotations from President Estrada,” June 10, 1999, p.1.
Public Procurement in the Philippines
13
it is in the following activities that greater than 50 percent of funds are wasted
on corruption:
• pavement of roads,
• tax collection,
• purchase of vehicles and equipment, and
• purchase of school textbooks.
Correspondingly, the government departments primarily responsible for these
activities have been rated as most corrupt, namely: Department of Public Works
and Highways (DPWH), Bureau of Internal Revenue (BIR) and Department
of Education (DepEd). At the DPWH, outright pocketing of public funds and
compromising volume and quality of materials, and at the DepEd, the overpricing
of textbooks, were seen as the most prevalent corruption practices.
The business sector is even more critical than the general public. According
to the 2001 annual enterprise survey of SWS, 63 percent of respondents felt that
there was ‘a lot’ of corruption in the government. A large majority of enterprise
managers (67 percent) think that public sector corruption was found in ‘both
revenue raising and spending’. However, a leaning is observed with 27 percent
thinking that corruption can be ‘found more in government spending’ compared
to the 3 percent who said that it was ‘found more in revenue raising’. Further,
55 percent of the respondents who mentioned the presence of corruption in the
public sector also said that ‘almost all/most companies’ in their sector of business
were involved in bribery to acquire government contracts, and that an average
of 22 percent of the contract was said to be allotted as bribe.
As a consequence, the government departments largely involved in procurement are viewed as insincere in fighting corruption. The DPWH suffered from a
Net Sincerity rating of -68 and the DepEd -9 4.
3.2 Bribes Eat Up as Much as 65 Percent of Project Cost
As pointed out by Benham and Benham (2001), costs of exchange affect what
is produced and what exchanges take place in the market. They affect which
organizations survive and which rules of the game persist. So is the case
with corruption in procurement. Corruption changes the goods and services
3
33 percent of the respondents said there was ‘some’ corruption in the public sector; 10 percent
‘a little’; 6 percent ‘none’.
4 The score for Net Sincerity in Fighting Corruption ranges from -100 to +100.
14
Roderica Taduran Stamer
purchased by the government. It affects which procurement projects push
through and which are shelved. It dictates the rules of the game and therefore
limit opportunities to only those suppliers/contractors who know them and are
willing to play them.
In 1998, an investigative report (Parreno 1998) called the attention of the
country to the massive corruption scheme involving projects funded by the socalled pork barrel funds of the legislators. The report painted a very disturbing
picture by claiming that as much as 65 percent of contract cost is eaten up by
bribes in the procurement of books and medicines, with 40-50 percent of the
contract cost going to the pockets of legislators. For the construction of roads,
school buildings or local halls bribes eat up about 35 percent of project cost.
These so-called pork barrel funds started to be instituted in 1990, when the
8 th Congress gave each legislator in the Lower House an annual allotment of PHP
12.5 million and each senator PHP 18 million for infrastructure projects, purchase
of equipment and materials, and other activities. Known as the Countrywide
Development Fund (CDF), it is supposed to correct the failure in the proposed
budgets of national agencies, which according to legislators, are not responsive
to the needs of their constituents.
By 1996, the legislators have allotted themselves a yearly PHP 30 million each
for the Public Works Fund (PWF). In addition, each lawmaker had at least PHP
15 million in Congressional Initiative Allocation (CIA) (for senior senators, this
amount runs up to PHP 100 million). These are budgetary items incorporated in
allocations for various agencies over which legislators have the power to direct
how, where and when they are to be disbursed. In 1998, CIA amounted to PHP
3 billion.
Projects funded by the pork barrel funds do not undergo the usual process
of evaluation to determine their feasibility. Further, a special provision in the
law, ensures that CDFs are automatically released once legislators submit to the
budget department a list of projects and activities they want funded by their
CDF allocations. Oftentimes, the proponent legislators themselves choose the
contractors or suppliers for the projects.
More blatant, the report claims that the amount of bribes goes higher, depending on how goods are to be delivered: full, partial or ghost. For ghost deliveries,
legislators get as much as 60 percent of the project cost. The implementing
agency gets 25 percent since the paperwork for ghost deliveries is difficult to
accomplish.
Public Procurement in the Philippines
15
In a society where hierarchy is important and there is a strong tradition
of deference to persons in authority, the poor constituents of these legislators
see nothing wrong with the practice. Or at least calls for more transparency
are not loud enough to effect material changes. Most of them see it as one
of the perks of public office. As long as their congressional representatives do
not turn them away when they need help for a wedding, a fiesta, or perhaps a
burial, the legislators are seen as doing their jobs. Besides, the constituents can
avail themselves of the temporary job opportunities offered by the infrastructure
projects funded by the pork barrel funds.
Another investigative report (Chua 1999) relates that it is not only in pork
barrel funded procurement that corruption prevails. Focusing on the procurement
of textbooks and supplementary educational materials, the report says that
local education departments have access to other funds that may be used for
procurement. In the case of textbook purchases, some 20 percent of the contract
cost goes to bribes, with as much as the half going to the education regional
director. For procurement of supplementary materials, suppliers are willing to
pay bribes of 40 percent of contract cost.
Suppliers explain that the higher affordable bribe in the purchase of supplementary materials is due to price caps and relatively rigid conditions (paper
specifications, relatively higher print runs, etc.) governing the purchase of
textbooks. Thus, there has been an observed increase in funds going to supplementary materials, where more bribes may be extracted, and a reduction in the
funds allotted for textbooks.
The local school board fund is another source of financing for books. Drawn
from the proceeds of the real property tax levied by the local government, this
fund is at the disposal of the local school board, which is co-chaired by the
provincial governor and the school division superintendent or the city mayor
and the district supervisor. In some rich Metro Manila towns, this fund reaches
about PHP 500 million each year. Bribes eat up 20-40 percent of contract cost,
depending on the relative powers of the school division superintendent or the
district supervisor. In any case, the provincial governor or the city mayor gets a
share of 20 percent.
This situation of massive bribery in the purchase of educational materials was
not always the case. In 1976, the government started the Textbook Project, whose
aim was to provide textbooks to all public schools. In 1985, the government
established the Instructional Materials Corp (IMC) to develop and distribute
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Roderica Taduran Stamer
textbooks to all public institutions. In line with this, the IMC invited authors to
submit manuscripts, which the education department reviewed and ranked. The
rights of top-ranked books were bought by the government and were developed
by IMC. The printing and distribution of these titles were bid out to private
entities. During that time, the average price of textbooks was around PHP 30.
In 1995, the Congress passed the Book Publishing Industry Development Act
aimed at developing the book publishing industry. Thus, the IMC was replaced
by the IMCS which evaluated manuscripts submitted by Filipino authors, based
on a list of competencies. The IMCS then came out with a list of approved books
(Textbook Call) with their corresponding price ceilings, which in turn were set by
the National Printing Office (NPO), education department and private publishers.
Additionally, the local education department offices were advised to negotiate
for discounts.
Under this system, school principals were asked to select books from the list,
and these orders were consolidated at the division and regional offices. In practice,
the regional directors made the final choice of titles to be procured, which in
many cases did not correspond to the orders of the principals. Accusations
of graft and corruption in procurement of textbooks were rampant, and the
average price of textbooks has risen to PHP 70 for grade school and PHP 120
for high school. The physical quality of books was likewise poor. Further, the
textbook-pupil ratio in 1998 stood at 1:6 in the elementary grade schools and 1:8
in high schools (Department of Education, Culture and Sports (DECS) 1998).
When the investigative report came out, violation of rules had already become
common practice. Supplementary materials which are not in the list of titles
approved by the education department were purchased. Overpriced materials
were also bought, the prices of which are certified by the NPO and are supposedly
based on lower print runs. Worst, ghost deliveries were likewise practiced.
3.3 Outdated and Fragmented Laws and Weak Oversight
Institutions Governed Philippine Public Sector Procurement
Prior to the reforms, public procurement was characterized by outdated and
fragmented laws and a proliferation of uncoordinated executive issuances (World
Bank 2003). The basic regulation that governed the procurement of infrastructure
projects was Presidential Decree (PD) 1594, a law passed in 1978 during the
dictatorship and which remained unchallenged for more than 20 years. A
partial survey revealed at least 40 legislative enactments, Executive Orders (EO),
Public Procurement in the Philippines
17
Administrative Orders (AO), PDs and issuances from government agencies. The
numerous executive issuances were promulgated in order to plug loopholes in
the system.
Uncoordinated and overlapping directives were the result. Oftentimes, a
variety of procedures and requirements has been prescribed which later has been
found to be inconsistent with each other. The Commission on Audit (COA) rules
were likewise not always made consistent with most recent changes.
This labyrinth naturally led to ambiguity and uncertainty. Without an oversight body to regulate and monitor procurement activities, procuring entities, on
whose shoulders the primary responsibility for the implementation and execution
of laws and rules rest, performed their duties based on their own knowledge,
understanding and interpretation of the laws and rules.
More problematic, procurement at the Local Government Unit (LGU) level
was subject to province or municipality specific regulation. Since the passage
of the Local Government Code in 1991, primarily focused on decentralization,
procurement rules were designed individually by each province and municipality.
There was absence of check and balance, in that the local chief executive (such
as the provincial governor or the city mayor) sat as the chairman of the bidding
committee responsible for bid evaluation. The influence of the local chief
executive in the bidding was so far reaching that effectively whoever he/she
favours could win the contract.
The legal mess that governed public procurement was likewise matched by
weak oversight and regulatory institutions. The COA is an independent agency
created by the constitution to audit government revenue and expenditures. Although the COA has also been an important source of information on malfeasance
committed by corrupt government officials, the extent of connivance of some
government auditors with corrupt practices in other government agencies is
likewise an issue.
The Office of the Ombudsman is the lead agency to enforce public accountability. It has the power to investigate and prosecute violators of antigraft laws.
However, the rate of sanction is very low. The Office of the Ombudsman reports
that in 1997, only 16 percent of reported corruption cases were advanced for prosecution, and at best less than 2 percent resulted in conviction (cited in World Bank
2000:40). It likewise lacked resources to perform its duties. In 2002, the Office
of the Ombudsman had only 32 full-time prosecutors handling more than 2,000
cases at the Antigraft Court; had 37 field investigators to watch over a bureau-
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cracy of 1.5 million public officials and employees; had no training programs for
prosecutors and investigators; and had no supervisory/monitoring/management
system of cases and prosecutors’ performance (Marcelo 2004).
4 Reforming Public Procurement in the Philippines: Building
Institutions
In 1999, the government, with the help of the donor community and the civil
society, started reforming its procurement system. 5 At a time when the highest
office of the land was rocked by a serious corruption scandal resulting in the
impeachment of the President, anti-corruption efforts were very much supported.
In 2003, the Government Procurement Reform Act (GPRA) was passed and was
hailed by politicians of the new administration as a successful first step in fighting
corruption. The potential savings that the government was not able to realize
in the old procurement system was the primary ‘selling point’ for the passage of
the law.
North (1990) argues that institutional changes come from the perceptions
of players in political and economic organizations that they could do better by
altering the existing institutional framework at some margin. Thus, institutional
change occurs when organizations deem it profitable or beneficial. Modifications
occur because individuals perceive that they can do better by restructuring
exchanges. This was true for the then soon-to-be impeached President who
thought that by supporting a legislation that is suppose to address corruption in
government procurement, the society’s furor over his own corruption activities
would be dissipated. This was likewise the case for the later sworn in President
who needed to show her strong conviction to fight malfeasance in the public
sector, amidst doubts about the constitutionality of her ascent to power. The
legislators both in the Lower and Upper Houses saw themselves becoming more
popular among the then very vigilant population by throwing their support for
the reforms.
While the President and the legislators played an important part in the passage
of the new procurement law, the backbone of the procurement reforms, it was
the Department of Budget and Management (DBM) which took the lead in the
5
A huge amount of information in relation to the passage of the law was taken from Campos
and Syquia (2006), the most detailed and comprehensive documentation of the reform efforts in
its early years.
Public Procurement in the Philippines
19
reforms. 6 It first secured technical assistance from the Canadian International
Development Agency (CIDA) to help the Government Procurement Service (GPS),
an office under its supervision, develop an electronic procurement system.
Further, to rationalize the procurement system by having an all-encompassing
law passed by the legislature, DBM sought technical assistance from the United
States Agency for International Development (USAID) to undertake an extensive
analysis of the problem and then, based on the analysis, to prepare a draft bill
that would address the system’s weaknesses. Submitted in August 1999, the study
revealed that opportunities for corruption in government procurement stem
from three factors: 1) excessively strict pre-qualification process for prospective
bidders; 2) excessive use of discretion in selecting the winning bidder; and 3) lack
of transparency that accompanies the bidding process. The draft bill proposed a
solution that emphasized deterrence and prevention.
Technical Working Group (TWG) discussions were conducted in August to
October 2000 resulting in the following: 1) a new EO 262, amending the
previous EO 302 for the procurement of goods, supplies and materials, and its
accompanying Implementing Rules and Regulations (IRR), and 2) the revised
IRR of PD 1594 for infrastructure contracts. The new IRR of PD 1594 took
effect in August 2000, and EO 262 became effective in December 2000.
In addition to these outputs, the TWG likewise produced a draft bill, which
the DBM requested the then President to certify as “urgent”. In October 2000,
the public furor over the President’s activities – mostly related to corruption and
abuse of power – was beginning to build steam. His staff saw the bill as one
way of helping contain the growing discontent. Unfortunately, by the time the
bill passed the Lower House and got to the Senate, the senators were already
gearing up for the President’s impeachment trial. Despite this disappointment,
the reform coalition headed by DBM realized that anti-corruption was an issue
that could be used strategically to move a bill forward when the public was very
vigilant about corruption-related issues.
In May 2001, a new President was sworn in, rising on a platform of good
6 In the process, the DBM sought the support of the other major spending government departments, such as the Departments of Public Works and Highways, Education, Health, Defense,
among others. It first convened an Inter-Agency Workshop to discuss possible reforms in procurement that may be pushed. The workshop concluded that the procurement process embodies the
principles of transparency, accountability, equity, effectiveness, efficiency and economy.
20
Roderica Taduran Stamer
governance and anti-corruption with the support of many of the civil society
organizations (CSOs) that clamoured for the previous President’s impeachment.
In her July 2001 State of the Nation Address, the new President stressed the
urgent need for good governance and, considering the inability of the bill to pass
the 11 th Congress, set it as a top priority for her administration. As Alston (1996)
explains, institutional change can arise from either a change in the demands of
the constituents or a change in the power of the suppliers of institutions. As a
result of a new election, or in the Philippine case the impeachment of a president,
another group could gain political power, inducing changes in the institutional
structure.
In October 2001, the President signed EO 40 7 claiming it as an early achievement of her administration in the fight against corruption. This is in line with
the observation of the World Bank’s Doing Business: How to Reform (2007) that
most reforms take place in the first 15 months of a new government. Thus, for a
government recently elected or re-elected, the time to push through ambitious
reforms is at the start of its term.
As the previous President was successfully impeached, the outrage of the
public against public sector corruption started to dissipate. The reform coalition
then formed a non-governmental organization specialized in procurement issues.
Procurement Watch Inc. (PWI) was launched in February 2001. Its immediate
task was to recreate a semblance of the impeachment ambience that could refocus
the public’s attention on corruption, at least to an extent sufficient to convince
enough legislators to support the needed legislation.
PWI approached key CSOs and engaged vigorously with each to get their
“buy in”. Additionally, PWI worked on the media to raise the news profile
of corruption in government procurement. A media team with considerable
experience in public relations, advertising, and political campaigns was brought
on board, whose campaign efforts was composed of four components: a)
targeted use of AM radio; b) invitation to “60 Minutes”-type TV shows; c)
regular but strategic news releases in print media, and d) an advertising campaign
complete with streamers, posters, stickers, and give-aways. Central in these
7 EO 40 consolidated the new implementing rules and regulations of PD 1594, EO 262 and new
rules for contracting consulting services into one document. Additionally, EO 40 mandated that
the country’s Electronic Procurement System (EPS) shall be the single and centralized electronic
portal for all types of procurement.
Public Procurement in the Philippines
21
media exposures is the emphasis on the proposed procurement reform bill as a
necessary first step to address the corruption problem in the public sector.
Meantime, the DBM has convinced the Speaker of the Lower House to
endorse the bill. In May 2002, the President certified the bill as “urgent” –
to address the public emergency borne out of the pervasive malady of
graft and corruption that has long plagued the government procurement
system, impaired public service efficiency, and stunted national capacity
for economic growth. 8
In October 2002, the bill was brought to the Floor for a vote and passed with an
overwhelming majority. At the same time in the Senate, the senator sponsoring
the bill gave a speech to the Floor entitled “Building Honest Roads to Progress”.
In urging his colleagues to certify the bill, he explained that the estimated 20
percent of procurement funds being wasted because of corruption (PHP 21 billion,
using 2002 figures) can finance 520 million textbooks for public school children,
the construction of 63,000 new classrooms, or the pavement of 1,500 kilometers
of farm-to-market roads (as mentioned in Syquia 2003). In December 2002,
the Senate passed its version of the bill. The Consolidated Bill was eventually
approved by both Houses. And on January 2003, the President signed the
Consolidated Procurement Reform Bill into law as RA 9184 or Government
Procurement Reform Act (GPRA).
The reform coalition was successful in using anti-corruption as an issue to
strategically move the bill forward in the legislature. Anti-corruption is a platform
that everybody supported. Nobody could be against it. Or at least, nobody
would admit to be against it. In both Houses, apart from the original sponsors
of the bill, a large number of legislators signed up as the bills’ co-sponsors.
5 The Government Procurement Reform Act: Reducing
Opportunities for Corruption, Breaking Barriers to Entry, and
Lessening the Likelihood of Collusion
While reducing opportunities for corruption may result in lower transaction costs
in procurement, breaking barriers to entry as well as lessening the likelihood of
collusion are two other institutional backbones that are clearly imbedded in the
new law, as can be seen from an examination of the GPRA and its IRR.
8 Correspondence of President Gloria Macapagal-Arroyo to Speaker Jose C. de Venecia, Jr.
dated May 27, 2002 as quoted in Campos and Syquia (2006).
22
Roderica Taduran Stamer
In order to attract more competition, the law requires that all procurement
opportunities be advertised in a national newspaper and be posted in established
websites, among which is the Government Electronic Procurement System (GEPS).
Prior to the reforms, bidding was sometimes limited to only a few by posting
advertisements in local newspapers of limited circulation. Chua (2002) has
documented cases wherein announcements of procurement opportunities have
been printed on early editions of newspapers or special print runs or where
all copies of the newspaper carrying the advertisement have been bought by
either the corrupted procurement official or the favoured supplier/contractor to
deliberately limit information dissemination.
Further, the GEPS has a feature of automatically advising registered suppliers
of procurement opportunities that match their products or services. This shift
to maximum information dissemination should make collusion more difficult
and hinder bid orchestration. Further, as more participate, the likelihood of
responsive bids being received increases. Additionally, to avoid tailor-fitting
specifications of the required goods, the GPRA prohibits reference to brand
names.
To simplify the process and avoid unnecessary delays, the GPRA streamlined
prequalification into a simple eligibility screening using transparent and nondiscretionary criteria. In the old system, prior to bidding and during the
pre-procurement stage, each document submitted by each prospective bidder was
checked and underwent a detailed validation procedure, which took time and
resulted in an excessively long procurement cycle. With the new law, detailed
verification and validation of submitted documents are done only in the postqualification stage for the bidder with the Lowest Calculated Bid. Further, due to
its computerized facilities, the GEPS and the DPWH require interested suppliers
and contractors to submit their eligibility requirements only once a year.
In order to enhance transparency, several new features are in place. First: all
necessary information about the procurement opportunity is made public in the
advertisements and the bidding documents, including the Approved Budget of the
Contract (ABC). In the old system, this figure was kept confidential presenting the
government official and the bidder/s an opportunity to collude in the revelation
of this inside information. Likewise, there was an observed high tendency of
failed biddings due to all bids being higher than the allowable ceiling.
Second: all activities by the Bids and Awards Committee (BAC) from the prebid conference to the contract award are open to the public. CSO representatives,
Public Procurement in the Philippines
23
who are knowledgeable about the nature of procurement and the law, participate
in the bidding activities as observers. They prepare a report of their observations
which they may submit to the Office of the Ombudsman in cases where prescribed
bidding procedures are not followed.
Third: members of the BAC, its Secretariat and the TWG are prohibited from
entertaining any form of communication from bidders.
Fourth: the new procedure for the opening of bids has several transparencyenhancing features which are primarily directed against bid rigging. All sealed
bids are opened in public during the bid opening in the presence of all bidders
and observers. Further, no previously-submitted sealed bid may be destroyed or
retrieved. This helps ensure that documents have not been altered and allows
manipulations to be detected at an early stage.
Fifth: to render complex procedures transparent and clear to potential suppliers and contractors, particular efforts to disseminate information on rules,
regulations and procedures are undertaken. Additionally, comprehensive procurement manuals have been drawn up and are easily accessible on the Internet.
In order to minimize discretion, the GPRA specifies that the Lowest Calculated
and Responsive Bid be determined using an objective, quantifiable and nondiscretionary criteria during the bid evaluation. In contrast, the old system
allowed trade-offs between price and quantity. Worse, it was likewise vague on
the difference between minor and major deviations. The new law, on the other
hand, pegs the technical requirements to a minimum and bidders compete on the
basis of price alone. This system then removes the discretionary power of the
BAC in deciding between a relatively high-quality high-priced bid and a relatively
low-quality low-priced bid.
When the bid evaluation involves quality-based evaluation, as in the case
of procurement of consulting services, the extreme scores (both lowest and
highest) given by evaluators for each proposal are not taken into consideration
in determining the mean scores of the proposals. This removes the possible
distortion in quality ranking by limiting the possibility that a bribed member of
the BAC can affect the result of the evaluation.
In order to promote consistency of rules, the GPRA covers all governmentfunded procurement activities of all branches of the government across the
country. Thus, interested suppliers or contractors face the same rules and
procedures when bidding on locally-funded contracts. In order to foster the
development of uniform procurement practice and policies, the Government
24
Roderica Taduran Stamer
Procurement Policy Board (GPPB), a central procurement authority, has been
established to supervise the individual procuring entities, monitor compliance
with the regulatory framework, set and harmonize policies, and recommend
reforms.
But like in any change of policy, there would be winners as well as losers.
In a compromise deal to pass the procurement bill, the reform coalition had to
accept a legislative insertion that gave preference to provincial bidders in the
procurement of provincial projects. In cases where the lowest bid is submitted
by a bidder not coming from the concerned province, the lowest bidder among
the provincial bidders is given the right to match this lowest bid. This special
provision, however, will only be effective for the first five years of the law.
6 Figures Suggest Gains Are Being Made from the Reforms
Four years after the passage of the GPRA, reform measures continue to be
put in place (World Bank 2005). Trainings are on-going to familiarize the
government procurement personnel on the law, its rules and the corresponding
bidding documents. PWI continues to train other CSOs in making them qualified
observers and works with the Office of the Ombudsman for the handling and
processing of various information and reports coming from the observers. Some
government departments, notably the DepEd, has tapped CSOs in monitoring
procured goods delivery.
Nonetheless, gains are clearly being made at this early stage. The first major
gain is namely the passage of a comprehensive law. As Asian Development
Bank/Organization for Economic Cooperation and Development (ADB/OECD)
(2006) explains, “a clear and comprehensive regulatory framework for the conduct of public procurement is a fundamental prerequisite for curbing corruption
in public contracting”. The establishment of rules in parliamentary law protects
the framework from short-lived changes. Further, rules laid down as guidelines
or written up in manuals are normally not legally binding.
Secondly, competitive bidding, as is now known by all involved in procurement,
is the rule and not the exception. The experience of the DepEd provides an
inspiring picture of what may be achieved from embracing competition. Apart
from being an active member of the reform coalition, DepEd likewise sought
the World Bank’s assistance in 1998 to address the problem of extremely low
textbook-pupil ratios in the form of a USD 44 million loan under the Social
Expenditure Management Project (SEMP) to procure textbooks (World Bank
Public Procurement in the Philippines
25
2004). The project delivered over 42 million textbooks to schools improving
the textbook-pupil ratios to between 1:1 to 1:2 in core subjects. It improved the
procurement and delivery of textbooks through the introduction of competitive
bidding procedures resulting in significant cost savings. The average price of
textbooks plummeted by 50 percent (to PHP 35 for grade school and PHP 60
for high school) in the first and second phase of the loan agreement, generating
savings of USD 23 million for a third phase.
Reduction in prices is likewise reported by the GEPS, which it claims to be
the result of posting procurement opportunities on the website.
Table 1 Posting procurement opportunities on the website
Savings (%)
Goods
53
Various drugs / medicines
43
Equipment for electrification projects
42
Printing of letterheads
33
IT equipment and supply/delivery of construction materials
25
Supplies/material and services
19
Construction supplies, IT equipment
17
Electrical/mechanical supplies and equipment
15
Various office supplies/equipment
15
Office supplies/materials
11
Vehicles and supplies/materials
Source: Government Electronic Procurement System 2006.
This claim is supported by several other indicators from the GEPS. Since it
is a requirement to be registered at the GEPS for interested suppliers to be
advised of procurement opportunities matching their offered goods/services and
to eventually be able to participate in the bidding of the required goods/services,
then figures showing the number of registered firms should give one an idea of
the size of the market of potential suppliers. The more firms register, the stiffer
the potential competition among them may be.
26
Roderica Taduran Stamer
Table 2 New registered suppliers
Year
Number of New Registered Suppliers
2001
854
2002
1,894
2003
1,875
2004
6,553
2005
5,264
Source: Government Electronic Procurement System 2006.
Similarly, the DPWH has reported an extremely large increase in the number of
bidders joining the bidding for infrastructure projects. In one case, this figure
had risen from 10 to 95 eligible bidders (Campos and Taningco 2001).
More participation is observed not only among the private sector, but likewise
within the government. As more and more offices of the government are trained
to familiarize themselves with the new law, and more particularly with the use of
the GEPS, more and more procurement opportunities are advertised/posted at
the website.
Table 3 Procurement opportunities advertised/posted
Year
Number of Advertisements Posted
2001
2,064
2002
10,016
2003
20,817
2004
42,945
2005
86,496
Source: Government Electronic Procurement System 2006.
Meantime, other government departments are likewise reporting shorter periods
of procurement. The DPWH says that the procurement cycle for infrastructure
projects has been cut down by as much as five (5) months because of the shift
from the tedious pre-qualification to the simple eligibility screening (Campos
and Taningco 2001). Further, because of the computerization of eligibility check,
screening of bidders takes only as much as 12 minutes. Additionally, according
to the DepEd, the procurement cycle, which used to be 24 months from bid
Public Procurement in the Philippines
27
opening to final delivery, has been cut down to 12 months.
Apart from much lower prices and shorter procurement cycles, the DepEd
likewise points out that better technical specifications and random monitoring of
CSOs at printing presses and warehouses and at delivery points improved the
physical quality of textbooks and avoided ghost deliveries.
The statistics enumerated above support the claim that much could be gained
from procurement reforms. While one may argue that the reduced prices, stiffer
potential competition, enhanced transparency, etc. may well have been caused
by another factor, a look at new legislations passed around the time of the GPRA
reveals that no other policy change may have led to the same results.
Survey results are reflecting these gains as well. There has been a marked
easing in the perception of corruption in procurement. SWS reports that the
proportion of managers saying that most or almost all companies in their sector
give bribes to win public contracts has fallen to 46 percent from 2004’s 52 percent
and a high of 57 percent in 2002 (Social Weather Stations 2006). Zooming in to
specific government departments, the DepEd seems to be doing well not only
in the reforms, it is likewise able to communicate its gains to the public. While
it suffered from a rating of -9 in Net Sincerity in Fighting Corruption in 2000,
it enjoyed an impressive +65 in 2001 and has since then stayed in the positive
territory.
7 Concluding Remarks
Prior to the reforms, various sources reported extremely huge costs of exchange
in procurement, partly due to rent-seeking behaviour. The absence of a clear
and comprehensive procurement law and weak oversight institutions were contributory to this situation. Realizing the losses it was incurring, the government
initialized institutional change by reforming the system of procurement and
successfully passing the GPRA in the respective legislative bodies. International
organizations like ADB, OECD and World Bank assisted the government by
making sure that the new procurement law would match international standards.
Thus, the government acted due to internal pressure but on the basis of already
existing frameworks being advocated by international actors.
Although the law has been changed, it is expected that it will take time for
the old norms to be replaced. Though still scant, some figures are showing
that gains are already being made due to policy change. The instalment of a
comprehensive framework led to competitive bidding, lower prices and a shorter
28
Roderica Taduran Stamer
procurement cycle. The question if the procurement law will lead to a significant
reduction of corruption can only be answered with time. Thus, it would be
advisable to conduct a systemic analysis of how much of the potential benefits
are indeed been realized. The Government Electronic Procurement System,
being the central procurement portal, should be the best starting point. The
Department of Education and the Department of Public Works and Highways,
once perceived to be run by corrupt officials, should be interesting case studies.
Such information would be very encouraging to the rest of the public sector in
embracing the reforms’ implementation, to the donor community in continuing
its support, and to the general public in playing its role as observers and monitors
in the procurement process.
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